Observations from Glitter Gulch

February 24, 2000

“Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”–Winston Churchill

After five long days of the Snowsports Industries America Las Vegas trade show, what I’m left with is that we may have finally reached the end of the beginning of the snowboard industry’s consolidation process.

In Vegas, the industry shows some signs of stabilizing–but it has a long way to go.

There were few new exhibiting snowboard companies, but not any less by my count. Prices were up, down, or unchanged depending on who you spoke with. But not too much either way.

Careful cash management has become more important than taking market share. With a couple of exceptions, senior managers seemed to feel that they had or could get enough cash to do what they needed to do, but not what they would like to do. Significant product innovations were rare. I saw only one new step-in system. Making a profit is still tough. Retailers seemed more deliberate, perhaps because there were fewer choices to consider. Many were still banking on closeout deals in October.

The Good NewsThe good news starts with SIA’s retail audit, where a big increase in hardgoods sales by units and dollars was reported through the end of December in both chain and specialty shops. Especially in boards, the dollar increases were generally more than the unit increases. This translates into an increase in the price per unit at retail. It’s about time.

Over the same period, snowboard-apparel sales plunged, but that’s more a reflection of last season’s unsustainable growth rate and poor weather than of a problem with apparel.

The chaotic oversupply that resulted from companies producing with the goal of achieving hopelessly optimistic projections, or to keep factories running, or to take market share from competitors, is gone. It’s been bludgeoned by the sacred sledgehammer of financial reality.

That’s not to say that overcapacity isn’t still an issue (see below), only that the conditions that lead to 40-dollar wholesale board prices are pretty much gone. At least they’re gone until confidence in Chinese production quality increases–but that’s a discussion for another time.

The next thing I noticed was that all the booths looked more or less the same as they each looked last year. Oh, they’d been renovated or dressed up and rearranged, but they were basically the same. Let me explain why this is really good news.

When an industry consolidates, managers have to start running their businesses differently if they’re going to be counted among the living.

The cornerstone of these changes in management perception and focus are financial. There’s a seminal moment when the realization hits home that all these cool marketing things would be great, but if we do them, we won’t be around to enjoy the benefits. At that moment, the competitive environment begins to get a little more rational and the tendency for new companies to enter starts to decline. We’re there.

At Vegas, I’ve always looked forward to walking around to see who had thought up “the next snowboard.” Usually, it was some strange contraption that might have made technical sense but had no chance from a marketing perspective. It wasn’t there this year. But there was one new board with an unusual technical innovation–a double camber.

Nobody I talked to had ridden it, but the consensus was that it made conceptual sense and might work. It’s important that it wasn’t just a board being introduced by somebody who wanted to be involved in snowboarding. It appeared to be the result of cautious development and careful market analysis and timing. Based on the background of the owner, I expect there’s enough capital behind it and the risk has been carefully thought out. I’ll bet they wouldn’t ve introduced it two years ago even if it were ready given that market’s conditions. In other words, it’s a rational product introduction based on a competitive advantage the owner believes can be validated in the market.

He doesn’t care if he’s cool.

That’s another positive indication of a market that is starting to behave rationally.

I say this every year, but the show was more businesslike than the previous year. As long as there continues to be free beer in the booths after the show closes, I can stand it. I say that every year, too.

Partly due to SIA’s good work on the subject and its decision to cancel the Snow Show, the buy/sell cycle is progressing more smoothly. There was plenty of business done in Vegas, but it wasn’t (and didn’t have to be) done in a frantic way. In the first place, it’s a lot easier to choose between 50 brands than 300. In addition, brands and retailers are doing more work before Vegas. More retailers, planning to carry most of the brands they carried last year, are coming to Vegas to confirm decisions they have largely made–not to begin and conclude the information-gathering process in five frantic days like they used to.

The final piece of good news is that there are 60-million people in the United States between the ages of five and twenty, over half of whom have not yet moved into adolescence. There’s plenty of room for snowboarding to grow.

We’ve also got the attention of every big company in the country with a brand name, because they know that if they can’t get the loyalty of some piece of this group, their future success is doubtful.

I guess that’s good news.

The Bad NewsWhen a consolidation happens, profits drop. That drop can be temporary or permanent. I’m not going to conclude that it’s permanent in the snowboarding industry–the demographics alone suggest there’s some money to be made–but the same handicap that’s kept skiing among the financially disabled has the potential to do the same to snowboarding.

That handicap is too much production capacity. There have always been more than enough factories. If every ski and snowboard factory in North America closed, there would still be enough manufacturing capability in Europe to supply all the skis and snowboards the world wants. Hell, there might be enough if all the plants outside of Austria closed.

Unfortunately, I don’t expect our excess capacity problem to go away.

The capacity problem is reflected in the actions of the (mostly) ski companies from Europe trying to establish their snowboard businesses in the United States. Unfortunately, I observed in Vegas some tendency on the part of European owners to interfere with the marketing direction the U.S. managers are trying to set, and I suspect that will be to the detriment of the brands’ success here. Oh well, I’ve seen lots of U.S. companies have the same problems when they tried to move into Europe. People who live in glass houses …

The point, however, is that these companies with tens of millions of dollars invested in snowboard and ski production equipment really, really, really want to make product to keep those factories running. They look at the whole market from a production, rather than a market, perspective.

I have some personal experience telling companies with factories that the market required less product. Their first priority is simply not brand positioning–it’s maintaining and increasing production. That’s the financial pressure point.

Then there’s the fact that we’ve still got more than 50 brands competing in North America. It’s too many. I still believe snowboarding can support more brands than skiing, but not 50. I expected to get to Vegas this year and see fewer.

The big brands, and the brands owned by big companies (whether they are making money or not), are likely to survive. They either have a balance sheet or access to capital that ensures it.

The small brands that have pursued a consistent strategy and niche also have a reasonable chance to be successful. They all report anticipated sales increases consistent with their historical growth. It’s potentially a breakthrough year for them because if a retailer wants any product from a smaller brand, there aren’t many choices.

As usual, being big or having a market niche seems to be the way to succeed. It’s tougher when you’re in the middle–either by size or brand positioning.

Knowing who your customer is has gotten tougher. What used to be distinct specialty markets now overlap, and many new customers are as interested in fashion as they are in the sport.

The demographics suggest a huge opportunity, but everybody wants a piece of it. Vegas was a sign of how tough it can be to balance business and management requirements with passion for a sport and commitment to a lifestyle. The winners will figure it out.

In Las Vegas, I saw light at the end of the consolidation tunnel, but land mines litter the ground between us and daylight. ––––––––––––––––––––––––––

Jeff Harbaugh works with action-sports companies in transition. Reach him at (206) 232-3138 or by e-mail at jaharbaugh@compuserve.com kely to survive. They either have a balance sheet or access to capital that ensures it.

The small brands that have pursued a consistent strategy and niche also have a reasonable chance to be successful. They all report anticipated sales increases consistent with their historical growth. It’s potentially a breakthrough year for them because if a retailer wants any product from a smaller brand, there aren’t many choices.

As usual, being big or having a market niche seems to be the way to succeed. It’s tougher when you’re in the middle–either by size or brand positioning.

Knowing who your customer is has gotten tougher. What used to be distinct specialty markets now overlap, and many new customers are as interested in fashion as they are in the sport.

The demographics suggest a huge opportunity, but everybody wants a piece of it. Vegas was a sign of how tough it can be to balance business and management requirements with passion for a sport and commitment to a lifestyle. The winners will figure it out.

In Las Vegas, I saw light at the end of the consolidation tunnel, but land mines litter the ground between us and daylight. ––––––––––––––––––––––––––

Jeff Harbaugh works with action-sports companies in transition. Reach him at (206) 232-3138 or by e-mail at jaharbaugh@compuserve.com